25 March, 2002 – Last week’s swoop by German multi-utility RWE on Innogy, the UK’s largest electricity supplier, has prompted some analysts to argue that the £3.1bn ($4.4bn) cash offer was too generous but that it was probably necessary to secure the European scale it is targeting.

The deal valued Innogy shares at 275p and required RWE to assume debt of £2.1bn and £300m in contract liabilities in addition to the cash outlay. “Looking at the value of Innogy’s assets given the poor conditions in the UK market, RWE has paid far too much,” said Jon Lane, Research Director at industry analysts Datamonitor.

Dietmar Kuhnt, RWE chief executive, said the combination would add “substantial benefits” to the group. Which would become the second largest power generator in Europe and the third largest electricity supplier with 20 million customers.

One of the other attractions of Innogy is its record of customer acquisition and innovation – the latter being difficult to put a value on. “.RWE hopes the acquisition will allow it to apply Innogy’s competitive market skills to its German operations. If it is right, the premium will be more than covered,” said Lane.

As part of the deal, RWE is acquiring Innogy’s energy storage business, Regenesys that is another part of the activity, which is difficult to value. RWE said that it attached no value to the business, which means that each of Innogy’s 4.7 million electricity customers and 1.9 million gas customers is costing RWE £410. Raimundo Fernandez-Cuesta of UBS Warburg thinks this is 55 per cent more than each customer is worth.

Jon Lane at Datamonitor points out that RWE is competing against state-owned EdF in the European utility landscape, and EdF is happy to overpay for businesses that it sees as strategically important. “Just looking at the bottom-line, RWE is overpaying for Innogy – but it has little choice. The fit between RWE and Innogy is strong and unlike may other European utilities, Innogy has no US energy business to cause RWE any PUHCA regulatory headaches,” said Lane.

RWE already owns Thames Water and, subject to regulatory approval, will be looking to cross-sell water and energy products. Dietmar Kuhnt said there would be savings from rationalising billing, customer service and administrative systems, without the need to cut large staff numbers.

“Innogy is a perfect fit for RWE’s multi-utility strategy. This transaction will lead to real benefits for both RWE and Innogy shareholders and customers,” said Kuhnt.

Brain Count, Innogy chief executive will remain in charge of Innogy, reporting to Mr Kuhnt. He said that the transaction would leave Innogy in a better position to compete with Centrica, owner of British Gas – the UK’s largest combined gas and electricity supplier with 38 per cent market share.

He indicated that the UK might see further consolidation and that four to six companies was probably the right number of supply companies, rather than the current eight. He did not rule out further acquisitions by RWE.